As boards began to reconvene in 2023 after the holiday season, they faced a uniquely challenging world. Not only is the geopolitical landscape turbulent but the global economy teeters near recession, a tridemic is overwhelming health care, and they must confront a fast-growing tide of climate-risk and ESG regulations that they are responsible for complying with.
These regulations are in place, or will be soon, in major financial markets the world over, including in the U.S., Europe, Singapore, Japan, UK, India, Hong Kong and more. As a result, stakeholder expectations have never been higher, too, for company and board performance.
Are today’s board directors equipped for the challenge? Some of the big proxy advisory firms are skeptical and are drawing up tougher voting recommendation guidelines for the 2023 proxy voting season to keep boards and committee chairs accountable.
The current landscape
To grasp these complex topics properly, board directors must be ESG knowledgeable and climate-literate. Unfortunately, too many are not. According to the Data Book from the Sustainability Board, published alongside its primary 2022 report, the number of ESG-conscious or competent directors is stubbornly low: 151 (12%) of the 1,260 directors surveyed from the largest 100 companies in the Forbes Global 2000 list for 2022. Of even greater concern is that only 5% have any kind of formal ESG or sustainability certification or accreditation, or have published a paper, research, book or report in those areas.
The PwC 2022 Annual Corporate Directors Survey is a barometer of American boardrooms. It showed that although most directors (86%) are confident of their board’s understanding of ESG strategy and 82% are familiar with the company’s ESG risks, less than two-thirds (63%) grasp climate change-related risks as they relate to their company. That said, awareness is becoming more baked in. Collectively, nearly two-thirds of directors surveyed (65%) reported that ESG is part of their board’s central enterprise risk management discussions.
Finally, the KPMG 2022 Survey of Sustainability Reporting found other vulnerabilities at the top table. Although almost all (96%) of the top 250 companies reported on sustainability or ESG and 80% set carbon-reduction targets, only 49% pinpointed social injustice or poor governance as business risks. In doing so, they failed to report on social issues DEI, modern slavery and labor practices as well as governance risks such as corruption, bribery and anti-competitive behavior.
The bottom line is that it is harder and harder to be a board director. There is jeopardy everywhere: more responsibility, more overall scrutiny and more focus on the fiduciary duty and duty of care. You must stay in compliance, avoid lawsuits and, for many a personal goal, simply stay in your board seat.
New rules in the U.S.
The SEC’s proposed rules around climate-related disclosures for public companies have dominated headlines and debates in the U.S. since March, and they remain a matter of great concern. The potential regulations focused on company information around:
- Climate-related risks
- Greenhouse-gas emissions
- Risk mitigation plans and oversight processes
- Climate-related financial metrics
The SEC wants to place boards squarely in the spotlight. Possible regulatory disclosures could include:
- Publishing which board members or committees have responsibility for the oversight of climate-related risks
- Naming which board members, if any, have expertise in climate-related risks
- Frequency of board and board committee discussions of climate-related risks
- Establishing if the board sets climate-related goals or targets
- How the board has oversight on progress against those goals or targets
We are nowhere closer to seeing the finalized version of these SEC regulations. A technical glitch prevented many of the thousands of public comments from coming through and then the decision by the U.S. Supreme Court last June to curtail the Environmental Protection Agency’s authority to regulate power-plant emissions has delayed matters further. The final regulations are expected to be released early this year.
Make no mistake, though: Regulations are coming to America, and board directors will need to get up to speed on them as soon as they are finalized, if not sooner.
Europe leads the way
Across the Atlantic, the EU is setting the pace for companies on the road to net zero, with the European Parliament formally adopting the Corporate Sustainability Reporting Directive (CSRD) for multinational companies. This legislation, which starts a phased rollout Jan. 1, 2024, means that companies will have to address more detailed, mandatory corporate reporting requirements on a huge array of environmental, social and governance impacts.
On the priority reporting list will be greenhouse-gas emissions, climate-change mitigation strategy and pollution — plus what effect the company is having on biodiversity and ecosystems.
Other international regulations to watch
The U.S. and Europe may be the headline acts, but there are so many more new regulations for board directors to watch out for. For many countries, the disclosure guidelines laid out by the Task Force on Climate-related Financial Disclosures (TCFD) are setting the gold standard for reporting, now followed by the Task Force for Nature-related Financial Disclosure (TNFD). Here are just some of the other international regulations boards directors must be aware of:
- The International Sustainability Standards Board will require companies to report their Scope 1, 2, and 3 emissions data under its upcoming climate disclosure rules, based on the GHG Protocol Corporate Standard, a global emissions accounting benchmark.
- Japan has been a trailblazer: in April, the Financial Services Agency told the country’s 4,000 largest companies that they had to comply with mandatory reporting that followed the Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations.
- In Hong Kong, companies must assess and disclose information around climate-change risks, following the Guidance on Climate Disclosures issued by the Hong Kong Exchanges and Clearing Limited in late 2021.
- In Switzerland, the Federal Council has recently passed legislation that will mean major Swiss companies, banks, insurers and financial institutions must make public climate-related financial disclosures as of Jan. 1, 2024.
- Singapore was another early pace-setter: As of the 2023 fiscal year, all companies in the agriculture, financial, food, forest products and energy sectors must produce an annual sustainability report, follow the guidelines set by the TCFD and comply with other climate disclosure rules set by the Singapore Exchange.
- In India, the top 1,000 companies must now produce annual business responsibility and sustainability reports to the same standard as their financial reporting.